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May 6, 2013

Obama’s Visit to Mexico Puts Spotlight on Drugs, Security

It would be impossible to make a state visit to Mexico and not address the war on drugs, and last week, as President Barack Obama prepared for his trip there, that topic and how it relates to the security of Mexico and the United States were clearly on his agenda.

Obama’s visit happens six months into the presidency of Enrique Pena-Nieto, former governor of the highly populated state of Mexico, whose campaign platform included plans to stem the continued escalation of food prices in the country, open the state-run energy sector to foreign investment and, above all, reduce violence nationwide.

To that end, Pena-Nieto also made it plain that his approach to the drug cartels and the violent crimes, murders, extortions and kidnappings to which they are inexorably linked and that have dogged Mexico for years, would be tough, but less bellicose than that of his predecessor, Felipe Calderon, during whose term close to 70,000 drug-related deaths took place.

But even though Mexico’s drug problems have become less the subject of headline news than they were before, and government statistics state that narcotics-related deaths have actually decreased since Pena-Nieto came to power, Mexico’s security issues are still a huge source of concern for foreign investors, according to Richard Segal, head of emerging markets strategy at Jefferies International in London, making it tough to take note of the progress Latin America’s second-largest economy has made in different areas.

“On the macro side, Mexico looks pretty good, and with all that’s happened there and the constant, negative headlines, the numbers have still been pretty consistent through the years,” Segal said. “Mexico has a reputation for being a tough place to pass real reform measures, but the reforms that were made 20 years ago have been effective, particularly monetary policy, which has allowed for flexibility and growth in the private sector, and this is the big difference between countries like Chile and Peru, for example, which are considered poster children for Latin America.”

Arguably, Chile and Peru are easier nations to govern since they are smaller and their populations are more homogenous than Mexico’s. They are also not plagued by the security issues that Mexico faces, Segal said, and if Mexico is to get to “the next level,” then the government must sort those out. Otherwise, “economic growth really doesn’t make a difference.”

Mexico is currently rated investment grade and since Pena-Nieto took office, it has caught the eye of more foreign investors, many of whom now believe that things may be changing and that the country may finally be turning a corner.

Today, Mexico has the potential to become an even more vibrant and profitable low-cost manufacturing center than China, Stephen Dover, international chief investment officer, Local Asset Management at Franklin Templeton Investments, wrote in a recent post on the company’s “Beyond Bulls & Bears” blog.

Not only are Mexican wages lower than Chinese wages, the country’s proximity to the U.S. will serve it well at a time when many U.S. companies are still strapped for cash and looking for cheaper production and transportation alternatives, he wrote.

“Mexico has signed 44 free-trade agreements, more than any other country in the world, in fact, twice as many as China has signed,” Dover wrote. “And Mexico’s really improved the quality of its manufacturing. So the quality and the productivity have increased significantly in Mexico.”

However, for Mexico to realize its full potential, reform is key, Segal said, and although Pena-Nieto has shown that he’s on a path to change things on the security front and to beef up reforms in education (where corruption has been endemic), energy (the privatization of Mexico’s state-owned oil company, Pemex, which is reportedly in the cards, is a move many foreign investors have been hoping for) and other areas, there’s still a long way to go—and not least because of the legacy of Pena-Nieto’s own party, the Partido Revolucionario Industrial (PRI), which ruled Mexico for about 70 years and was notorious for corruption and electoral fraud.

Mexico’s economy is slated to grow by 3.4% this year according to most recent International Monetary Fund (IMF) forecast. By contrast, Brazil—the largest economy in Latin America and one that Mexico is often compared to—may only grow by 3%, according to the IMF, which has cut its Brazil GDP outlook thrice since predicting 4.6% growth last July.